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Saturday, March 31, 2012

Here’s my take: to begin with, economics is basically bulls**t. I mean, it’s necessary bulls**t, sometimes even useful bulls**t, but I’m extremely skeptical of people who think economics is a science or that it could be a science. We have to make policy decisions (and investment decisions and personal consumption decisions etc.), and we have to have some basis for making them. We could just use intuition, and we often do, but it’s helpful to use logical thought and empirical data also, and systematic study using fields like economics can help us to clarify our intuition, our logical arguments, and our interpretation of the empirical data. The same way that bulls**t discussions that don’t make any pretense at being science can help.

Economics is bulls**t because it relies on the premise that human beings behave in a systematic way, and they don’t. Once you have done enough research to convince yourself that they behave in a certain way, they will change and start behaving in another way. Particularly if they read your research and realize that you’re trying to manipulate them by expecting them to continue behaving the way they have. But even if they don’t read your research, they may change the way they behave just because the zeitgeist changes – cultural sunspots, if you will.

Interesting read. Nothing much that traders haven't realized. But economists don't seem to get it in their unreasonable quest for the holy grail of economics in models that look like physics and chemistry rather than the life and social sciences. People are not like atoms, and groups are not like molecules either.

George Soros had pointed to something similar in his General Theory of Reflexivity. Human beings are reflexive in that they self-adjust based on feedback. As KNZN observes, even if an economic model could be developed, incorporation of it into collective conscious (of market participants, for example) would alter its behavioral assumptions through reflexivity.

Money creation is a public utility. In the United State, the US Constitution, Article 1, section 8,10 establishes the federal government as the currency sovereign with a monopoly on currency issuance. Under present institutional arrangements, the federal government creates a central banking system, the Federal Reserve System, and allows banks and bank-like institutions to generate credit money denominated in USD by extending credit. The banking system is a public-private partnership already, and the argument that banks are "private" is simply mistaken. Regulators are already required to put insolvent institutions into resolution. According to Bill Black, the law did not fail in the present crisis, the regulators did.

There is little question that the federal government acting through elected representatives can determine money and banking in the US largely as it sees fit. The question is to what extent should the money creation process and banking in general be public or private.

Those who favor free banking would like to see money and banking completely under the control of the private sector, with government borrowing from the private sector to fund itself and using taxation for revenue. Thus government would be a currency user, and its policy space would be extremely limited.

At the other end of the spectrum is a currency only system in which government issues currency directly without needing to tax to get revenue or to borrow to finance itself. This, of course, puts an enormous amount of power in governmental (political) hands, and it greatly expands policy space.

I don't think that there is a way to resolve the issues involved through going to either an entirely private or an entirely public system, or, for that matter, a remix of the present system. The problem isn't configuration bu rather perverse incentives that distort the system. Any system can work with the appropriate incentives and controls to make it work as desired.

One thing we do know for sure is that the present system is broken and that if it is not repaired, the next crisis is already in the making.

The next time your friend, colleague, family member or local politician says to you, "How are we going to pay back the Chinese" you tell them...

We paid back $32 trillion in the past six months and there has been no hypinflation, interest rates are at zero, the stock market is up, the economy is growing, jobs are being created an life is going on as normal.

Video below from after the market close yesterday of Mike shredding on the topic of the true nature of US "debt" and fiscal deficits.

Mike is able to reveal the truth of these issues through the use of professionally recognized terms and procedures of accounting and economics. Mike's professionalism is played off in the piece against the metaphoric rantings of two politicians, Simpson and Bowles, who here are made manifestly morons and blind on these issues, with Simpson first referring to the debt as "16T babies" and later Bowles using the word "cancer" on the deficit. Unfortunately "Moe and Larry" here have been selected to co-chair a US government committee on the deficit.

In contrast to these two government stooges, the Bloomberg host Ms. Massar seems legitimately intrigued and interested in the fresh, hopeful, positive and truthful MMT based economic perspective expertly communicated by Mike in this piece. Here's hoping that this interest continues at Bloomberg, and will lead to more appearances by Mike, and more reporting there that keeps the insights of MMT in view.

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Just caught Rick Santelli talking about the U.S. needing to rollover $6 trillion in maturing debt in 2017. (He must have read Caroline Baum's article.)

If Rick checked the Treasury's website (https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=12032800.txt) he would have found out that the U.S. rolled over $32 trillion of debt THIS FISCAL YEAR ALONE without so much as a hiccup. And, by the way, interest rates have been coming down all along the yield curve, the Fed funds rate remained at zero, the dollar went up, stocks rallied, the economy grew, etc, etc, etc. In short, no disaster, no crisis, even though the amount rolled over was more than 5 times the amount that Rick is apparently worried about.

Personal spending up sharply (0.8%) in Feb, blowing away all forecasts, however, personal income up only 0.2% and January was revised down, from an originally reported gain of 0.3% to 0.2%. The savings rate fell to the lowest level in three years.

Households are spending out of savings and taking on more debt because income gains are just not there, despite the increase in jobs. The spending is not sustainable under that arrangement. It can only last for so long—either people run out of savings or, their debt gets too high again and they cut back.

Thursday, March 29, 2012

Yu Yongding, President of the China Society of World Economics, was formerly Director of the Chinese Academy of Sciences Institute of World Economics and Politics. He has also served as a member of the Monetary Policy Committee of the Peoples’ Bank of China, and as a member of the National Advisory Committee of China’s 11th Five-Year Plan.

His conclusion is, shall we say "controversial," in light of MMT and allies like Wynne Godley that predicted the global financial crisis and explain what to do to correct in terms of a well-developed heterodox theory.

This cycle of theoretical stagnation --> comfortable professional consensus --> internal revolt --> outside pressure seems to be common to a lot of scientific disciplines. However, there are a few big differences between the two insurgencies I've described, all of which suggest that Lucasian macro will be around long, long after string theory has disappeared behind the event horizon of history.

For one thing, physics is suffering from being too good. Our existing theories may be ugly, but they work devilishly well. This means that if physicists decide to abandon string theory, they will just dream up something else, possibly using many of the very mathematical insights that they gained from working on string theory! In macro, on the other hand, we basically have no theories that work well (or if we do, we don't know which ones they are!), so if we give up on DSGE, we're stumped...and people don't like to be stumped. Second, while demand for high energy particle theorists appears to have collapsed, demand for macroeconomists continues to be incredibly strong. Finally, economics as a profession does not have the experimental tradition that physics has, which means that not making predictions is a much less severe public relations blow to a physics theory than to an econ one.

The root of Europe’s sovereign debt crisis can be found in the fact that investors are concerned that countries in the periphery might default, causing them to demand a higher yield on government bonds. What’s needed is a way of giving peripheral debt a high degree of safety while allowing peripheral countries to remain users of the euro.

A simple solution to this problem would be for peripheral countries to begin issuing a new type of government debt: the “tax-backed bond.” Tax-backed bonds would be similar to current government bonds except that they would contain a clause stating that if the country failed to make its payments when due—and only if this happens—the bonds would be acceptable to make tax payments within the country in question. This tax backing would set an absolute floor below which the value of the asset could not fall, assuring investors that the bond is always “money good,” leading to lower bond rates and thus ensuring that peripheral countries would not be driven to default.

Caroline Baum is a Bloomberg.com columnist who writes about bonds, banks, budgets and bubbles, of which she seems to know nothing. Maybe that's because Ms. Baum has a degree in poliitical science and cinema studies (which I guess qualifies her in the eyes of Bloomberg to write about bonds), but I'm not here to cast aspersions.

In her most recent piece, "Four Numbers Add Up to an American Debt Disaster," Ms. Baum has produced a real doozy. In that column she basically states that the United States is facing a "crisis" and a "disaster" becauase a lot of its debt is short term debt and $5.9 trillion of it is going to have to be rolled over five years from now.

Here's an excerpt:

"In plain English, the Treasury’s reliance on short-term financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nation’s structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the U.S. in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years -- probably at higher interest rates."

"In plain English??"

"Issuing short term debt helps to conceal the depth of the nation's structural imbalances??"

What the hell does that mean?

"Puts the U.S. in the precarious position of having to roll over 71% of its privately held marketable debt?"

Oh really?

Even if Ms. Baum were not well versed in MMT, or if she didn't understand the fact that there is never a problem rolling over debt denominated in a nation's own currency, she still could have gone to the Treasury's website and had a look at the amount of debt that the Treasury rolled over, successfully, last year. Had she done that Ms. Baum would have found that the Treasury rolled over $64 trillion of debt last year (see chart below) without so much as a hiccup. And, by the way, interest rates went down all along the yield curve, the Fed funds rate remained at zero, the dollar went up, stocks rallied, the economy grew, etc, etc, etc. In short, no disaster, no crisis, even though the amount rolled over was more than 10 times the amount that Ms. Baum tells us will produce a disaster.

And that's just the tip of the iceberg because in the past 10 years the Treasury rolled over $473 TRILLION of public debt (almost 80 times Baum's disaster-triggering-quantity), once again without any problem whatsoever. Rates even came down.

Just by looking at the data any reasonable person would have had to question their premise that a $5.9 trillion rollover five years from now would be something that triggered a crisis and a disaster. However, Caroline Baum did not bother to check. Ms. Baum prefers to engage in fear mongering.

I cannot tell if this is ignorance or subversion, but I'll give Ms. Baum the benefit of the doubt and call it ignorance. Whatever it is, it's fear mongering and It's completely irresponsible. It's also terribly shoddy journalism because the facts are easily available to anyone who would take five minutes to go get them.

Wednesday, March 28, 2012

I have been reading Thomas Palley's new book, From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics. He argues that the ongoing crisis is not just a downturn in the business cycle, but the manifestation of the exhaustion of the neoliberal paradigm for economic growth1. Palley points to underlying structural contradictions, such as the role of consumer debt in the United States of providing the mass-based aggregate demand for consumption no longer sustainable when the overwhelming majority of workers do not participate in income gains from improving productivity. The expanded power of the less-regulated financial sector fits nicely into this thesis. Palley also discusses flaws in how the United States has come to fit into the global economy.

A new report published by the Organisation for Economic Co-Operation and Development paints a grim picture of the world in 2050 based on current global trends. It predicts a world population of 9.2 billion people, generating a global GDP four times the size of today’s, requiring 80 percent more energy. And with a worldwide energy mix still 85 percent reliant on fossil fuels by that time, it will be coal, oil, and gas that make up most of the difference, the OECD predicts.

Should that prove the case, and without new policy, the report warns the result will be the “locking in” of global warming, with a rise of as much as 6° C (about 10.8° F) predicted by the end of the century. Combined with other knock-on effects of population growth on biodiversity, water and health; the report asserts that the ensuing environmental degradation will result in consequences “that could endanger two centuries of rising living standards.

Ars [Technica] looked in detail at the 320-page report in order to summarize its key findings.

The message from the OECD is clear: the status quo is no longer acceptable. “Progress on an incremental, piecemeal, business-as-usual basis in the coming decades will not be enough,” it states, quite categorically. And that’s not coming from an environmental think tank, but an international body (albeit one with a Eurocentric outlook) with 34 members with the remit of stimulating economic growth and trade.

Mentions Warren Mosler at the end: "And I happen to think Warren Mosler's idea from a year ago of essentially (and somewhat sneakily) creating a new Greek currency (but not quite) by turning Greek bonds into a form of money (means of payments for public debt - pay your taxes with a bond!) was pure genius."

See also the Wikipedia article on the Bancor global currency proposed by Keynes for some history on the concept.

In fact, he doesn’t even really have a widely-used clever acronym yet. He told us that monetary circuit theory/MCT is the best one, and it’s one that already has a Wikipedia entry with several Keen-related footnotes.

Oh, and we are not hating on Keen, but there’s a prize* for the commenter who most accurately guesses Izzy’s concern with his theories.

MMR is directly engaging MMT, which is the first coordinated instance of debate and therefore an encouraging sign of progress. While there have been other debate between economists and MMT, they have not be coordinated and sustained, and many have been rather superficial, since the opposing party was ill-informed about MMT. That seems to be changing.

It's always good to have a nemesis, or as the Native Americans termed it, a "tormentor." Keeps warriors sharp.

The overall issue here is twofold. First, it is getting the professional presentation correct. Secondly, it is about translating the professional presentation into terms that non-professionals can understand, so they can get some insight into the issues and how professionals deal with them.

For example, there are a great many books explaining quantum mechanics to non-physicists, but without the math one simply cannot understand QM. Most fields are like that. One needs the background and tools to grasp them, and simplified explanations are necessarily imperfect compromises. But they should be as accurate as possible without overly complicated matters to the degree that non-professionals cannot grasp them.

This is the different between blogs and introductory courses, and graduate study and professional work.

The full mechanics of money supply endogeneity seem to be one of the remaining mysteries of macroeconomics. As I have explored for a couple years now (see for example the most recent two posts, A Visual Guide to Endogenous Money and the Failure of QE and Kaldor on Money Supply Endogeneity) there appears to be a truly remarkable layer of money supply dynamism that even most modern Post Keynesians fail to discuss. (And the mainstream of course remains hopelessly unaware, stuck on inapplicable theories like IS/LM that treat financial assets like commodities!)

Nice article by Ben Strubel entitled, "Who’s Afraid of the Big, Bad National Debt?" where he points out, as I have in the past, that we "pay off" many trillions $$ each year--far in excess of the amount outstanding--without even so much as a hiccup.

The chart below shows that the U.S. paid off $473 trillion in the past 10 years.

Strubel also gets into the insidious and dangerous propaganda campaign of the Congressional Budget Office, which is run by a bunch of fiscal responsibility hacks that continue to pump out tons of misinformation like this:

Reading this stuff is painful. "Reduces the amount of saving devoted to productive capital?" So how would they explain the huge increase in personal savings that came about simultaneously with the explosion in the deficit/debt?

Really amazing. The dogma has become so ingrained that even obvious and unequivocal PROOF of its falsification is ignored.

This leads Lakoff and Haidt to strongly reject what you might call the “Enlightenment model” for thinking about reasoning and persuasion, and leads Kahan to talk about motivated reasoning, rather than rational or objective reasoning. Once again, these thinkers are essentially agreeing that because morality biases us long before consciousness and reasoning set in, factual and logical argument are not at all a good way to get us to change our behavior and how we respond.

This is also a point I made recently, noting how Republicans become more factually wrong with higher levels of education. Facts clearly don’t change their minds—if anything, they make matters worse! Lakoff, too, emphasizes how refuting a false conservative claim can actually reinforce it. And he doesn’t merely show why the Enlightenment mode of thinking is outdated; he also stresses that liberals are more wedded to it than conservatives, and this irrational rationalism lies at the root of many political failures on the left.

While this article is chiefly about conservative values, it also talks about liberal values and the science underlying understanding them.

Although Mooney doesn't discuss the relation of value systems and economics, the implications of the scientific findings are rather obvious. This article explains the cognitive-affective rationale explaining why liberal and conservative approaches to policy including economic policy are as they are.

I’m not sure how any non-MMT economists are interpreting the MMT view of “monopoly money” (and I don’t really care—there are blogs by MMT economists that can answer and authoritatively discuss that question rather easily for those interested, so I’m not quite clear on why there’s any interest in relying on secondary sources), but here’s what it actually means:

1. By virtue of naming the thing that settles a tax payment (i.e., reserve balances in the US, which provide the final settlement of tax payments; while the IRS and govt accept checks drawn on private bank accounts, these are not what is actually transferred to the Treasury’s account at the Fed), there is a demand created for this particular “thing.” Note that this is ‘sufficient’ to create such a demand, though not necessarily ‘necessary AND sufficient’ for doing so. Also, ‘naming the thing that settles a tax payment’ presumes tax payments can be enforced—i.e., in a democracy, the people in the aggregate have submitted to this. It’s a state theory of money, not a theory of the state (that would be the realm of politics and political theory, by the way).

2. If the “thing” that settles tax payments is also something that the govt itself can create costlessly (i.e, via keystrokes), then there is no limit to the govt’s operational ability to spend, and neither tax revenues nor bond sales actually finance the government’s spending. Further, the govt’s “money” is its own liability in this case (as opposed to if it were to name gold as the “thing”) and also an asset of the non-govt.

3. The state can set the bid and the ask for its liabilities and thereby control the interest rate on its own liabilities (i.e., the federal funds rate in the US). Other rates will generally arbitrage to varying degrees against this rate, but the state can only set these other rates in a more precise manner by actively entering those markets. So, there is a monopoly over the “own” interest on the state’s liabilities, but not necessarily on other rates.

4. The state can set the price that it will pay to purchase goods and services, and this will have some effect on the aggregate price level. How much depends on how significant the state’s purchases are relative to purchases others make. (In the case of the Job Guarantee, for instance, this effect wouldn’t be overly strong—the stabilization effect on aggregate prices in that case comes mostly from the functional finance nature of the spending on the program. Setting the JG wage has the effect of not pushing up private sector wages, but it does not itself mean private sector wages won’t rise—that effect will mostly be tempered by the countercyclical spending on the program, and even then there are other things in the economy that can affect costs and prices. The claim is that the JG will not be inflationary and will be somewhat stabilizing, not that it will set the aggregate price level—and again, even in that case the effect is through functional finance, not setting the wage.) So, “monopoly” here is simply monopoly over the prices of the things it buys or sells, which in the real world states often don’t exercise at any rate.

5. The state cannot directly control the quantity of non-state liabilities (such as bank liabilities) that circulate as media of exchange. And it shouldn’t try (those that think it should try are called Monetarists, or at least traditional Monetarists). This is quite clear in Randy Wray’s first book, Money and Credit in Capitalist Economies, as well as in the horizontalist/circuitiste literature that we largely agree with. So, there is no “monopoly” of non-government monies. They have always existed—Randy’s very clear that private credit money pre-dated state money—and are created endogenously.

6. The state cannot directly control the quantity of state liabilities circulating. As we’ve noted many times, the government’s deficit is endogenous—attempting to balance the budget or run a surplus in a recession, for instance, could lead to even larger deficits.

7. So, overall, beyond the fact that it is not operationally constrained given 2 above, the state's "monopoly" is generally a monopoly over the price of its own money--the interest rate on its money--and the price of things it purchases or sells. Nothing more than that. Nothing less, either.

There's no doubt that birth rate is an indicator of a nation's economic well-being. Typically birth rates are lower in countries with fewer jobs, according to the OECD.

The birth rate has been falling since the housing bubble burst in 2007. 3.98 million children were born in the 12 months ending in June 2011: 8 percent fewer than the peak of 4.32 million in 2007. Nearly half of that decline has occurred since the end of 2009.

"An Objectivist America would be a dark age of unhindered free enterprise, far more primitive and Darwinian than anything seen before."

Chilling summary of what life would look like under Ayn Rand's doctrine of Objectivism. Realize that this is not just some scary fiction: her ideas are being pushed by people like Paul Ryan the entire Conserative movement.

"In an Objectivist world, the reset button would be pushed on government services that we take for granted. They would not be cut back, not reduced -- they would vanish. In an Objectivist world, roads would go unplowed in the snows of winter, and bridges would fall as the government withdrew from the business of maintaining them -- unless some private citizen would find it in his rational self-interest to voluntarily take up the slack by scraping off the rust and replacing frayed cables. Public parks and land, from the tiniest vest-pocket patch of green to vast expanses of the West, would be sold off to the newly liberated megacorporations. Airplane traffic would be grounded unless a profit-making capitalist found it in his own selfish interests to fund the air traffic control system. If it could be made profitable, fine. If not, tough luck. The market had spoken. The Coast Guard would stay in port while storm- tossed mariners drown lustily as they did in days of yore. Fires would rage in the remnants of silent forests, vegetation and wildlife no longer protected by rangers and coercive environmental laws, swept clean of timber, their streams polluted in a rational, self-interested manner by bold, imaginative entrepreneurs."

"The poor and elderly, freed from dependence on character-destroying, government-subsidized medical care, would die as bravely and in as generous quantities as in the romantic novels of a bygone era."

"Minimum wage laws would come to an end, providing factory owners and high- tech startups alike with a pool of cheap labor competitive with any fourth-world kleptocracy. All laws protecting consumers would be erased from the statute books."

"Mass transit would grind to a halt in the big cities as municipal subsidies come to an end."

"Corporations would no longer be enslaved by antitrust laws, so monopolies and globe-spanning, price-fixing cartels would flourish. The number of publicly held corporations would be reduced to a manageable, noncompetitive few. Big Pharma would manufacture drugs without adequate testing for safety and efficacy—deterred only by concern for their reputation, as described by Greenspan in 1963. Except that with competition reduced by mergers and legal price-fixing, the market would be a feeble substitute for even the FDA."

The author goes on to say...

"Those of us who oppose Rand’s vision of radical capitalism need to read Rand and understand the flaws in her assumptions and illogic of her vision, just as people during the Cold War studied Communism so as to more effectively oppose it. Having read and understood her books and essays, one is in a better position to identify and then to respond to the right’s extremist agenda, and to recognize her ideology when it becomes manifest in society."

Wray comments on the debate between Keen and Krugman over Minsky, and procedes to elucidate Minsky. Wray was a Phd student of Minsky and is regarded as an expert in Minsky's work. Minsky's work is an an essential building block of MMT macro, along with Godley and Lerner. Many people seem to associate MMT with the influence of Godley and Lerner while being largely unaware of Minsky's influence. It was Minsky who proposed a job guarantee, for example, although the MMT JG is substantially different from Minsky's.

I think it is fair to say that without understanding Minsky's contribution it is impossible to approach MMT as a macro theory, in that Minsky's contributions to understanding the role of money & banking, as well as finance (and financial instability in particular), are crucial elements in the development of MMT macro theory. Unfortunately, most of this work is in professional publications rather than on the blogs, so many people familiar with MMT chiefly through the blogs miss the important role of Minsky's contributions in MMT macro. Professor Wray sets out to correct that in this series that summarizes his previously published work.

Steve Keen also observes that the ratio of vertical money creation and horizontal money creation is crucial to financial stability. The ratio has tipped strongly in favor of horizontal money creation and the creation of money-like instruments in many countries, thereby increasing financial instability. He recommends increasing the share of vertical money for greater stability, as well as more prudential regulation of the financial sector in order to reduce systemic risk. Steve is getting a lot of exposure on this recently.

Monday, March 26, 2012

Read it at Fictional Reserve BankingCareful with the saving terminology: a reply to JKH
By Joseph Laliberté and circuit.
(The authors reside in Canada and come from two different heterodox backgrounds, namely, MMT and the post-Keynesian/circuitist tradition.)

[Rep. Paul] Ryan offered up the sequel to last year's failed country club conservative budget and explained that he purged programs for the hapless because a social safety net: ". . . lulls able-bodied people into lives of complacency and dependency, which drains them of their very will and incentive to make the most of their lives. It's demeaning."

Well, MMT seems to have dispatched the "affordability" issue. Now here's a new twist (with a familiar ring) that seeks to frame the issue in moral terms rather than economic. Does it hold water psychologically, behaviorally, and sociologically? Or is it the assertion of an ideological norm based on a non-empirical presumption?

Not to worry though, "experts" will dutifully produce a study purporting to show that it is factually true. That is not going to simple, however, since some countries with high productivity also have strong social programs.

But I think that we are finally getting down the nub of the argument. The conservative position is basically that government assistance weakens the moral fiber of a nation, while the liberal position is that government assistance mends the holes in the social fabric.

MMT proponents would argue that there are compelling arguments based on macroeconomics, dealing with effectiveness with respect to public purpose and efficiency with respect to employment of resources.

It is difficult to argue efficiency regarding any government program with those who are convinced that the private sector is inherently more efficient than the public sector in all cases, however, since this is an ideological norm in that world view. Is it based on empirical evidence though?

There is reason to hold that a more competitive system is more efficient, but the question is whether are all private solutions to social issues more competitive than a government solution or a public-private partnership with government providing the funding. For example, the US has a private system for providing healthcare to the working population through occupational benefits. It has been resoundingly unsatisfactory based on the level of complaints and calls for change. Those relying on the inefficiency argument have more work to do to be convincing.

Effectiveness of economic policy is a matter of achieving policy goals determined by public purpose, different conceptions of public purpose will generate different policy goals. The argument here does beyond what is desirable for a society, however. It hangs on the conception of the purpose of life, human nature, human action, and motivation, which are all basically philosophical questions.

Most people do not think through their fundamental views reflectively, however, or engage in debate about them. They receive them through enculturation, and they never question them later. These become the norms of that particular viewpoint that define the boundary conditions of an ideology.

Here is where ideology, norms, values, moral issues arguments become essential constituents of the economic debate over effectiveness with respect to public purpose and policy goals. It is the direction that the framing of the debate is now heading toward the election as politicians rally their constituencies based on ideological presumptions.

What is emerging is a picture of a deeply divided America and a battle for the center with respect to electoral college votes between strategists of both parties, who shape the framing of issues and arguments. As George Lakoff observes, there is no actual centrist position. Centrists are "bi-conceptual," holding some view of the right and some from the left, such as social liberal-economic conservative, or social conservative-economic liberal, whereas the left is socially and economically liberal and the right socially and economically conservative.

Economic arguments are generally not a viscerally powerful as moral ones. Paul Ryan understands this as is appealing to the conservative mindset that values personal initiative and individual freedom highly, seeing these as necessary conditions for individual freedom and continued freedom as a nation. So expect more of this kind of argument as the campaign heats up and values come the issue more than economic reasoning.

George Lakoff observes that conservatives have been much more successful at moralizing than liberals, even though American morality tends to favor liberal positions with respect to social issues.
Actually, it is quite amazing how ultra-conservative Christians don't seem to see any contradiction in holding positions advocated by Ayn Rand — who Rep. Ryan and other prominent conservatives publicly embrace even though she is on record as a vocal opponent of traditional Christian values based on love of others and altruism. But moralizing doesn't need to pay too much attention to reasoning, since its appeal is visceral rather than logical.

There was an article in the China-based news service, Caixin (I caught this on Zerohedge) the other day, written by one "independent economist" named Andy Xie.

Turns out Mr. Xie was the former "star" chief Asia-Pacific economist for Morgan Stanley. (Doesn't take much to be a "star" over at Morgan Stanley, apparently. A general lack of knowledge on economics will suffice.)

Anyway, in the article Xie opines on the outlook for Japan, where he gives us these pearls of wisdom:

It is a fact that when it comes to the oddly resilient Japanese hyperlevered economic model, the bodies of those screaming for the end of the JGB bubble litter the sides of central planning's tungsten brick road. Yet in the aftermath of last month's stunning surge in the country's trade deficit, this, and much more may soon be finally ending. Because as Caixin's Andy Xie writes "The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then." As for the bubble pop, it will be a sudden pop, not the 30 year deflationary whimper Mrs. Watanabe has gotten so used to: "Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market." It gets worse: "Of course, the government will collapse with the JGB market." And once Japan falls, the rest of the world follows, says Xie, which is why he is now actively encouraging China, and all other Japanese trade partners of the world's rapidly declining 3rd largest economy to take precautions for when this day comes... soon.

A FACT THAT JAPAN IS HYPER-LEVERAGED??

FACING INSOLVENCY??

COLLAPSE OF THE JGB MARKET???

This crap is beyond ignorant. It is mind-numbingly dumb ass stupid.

The really, really, sad part, though, is that as dumb as this (to use Matt Franko's term) moron is, policy makers in Japan will read this and believe it to be true. That's right. Mark my words. Political leaders in Japan will start talking about cutting the debt to avoid insolvency. And don't be surprised if you even hear officials from the Bank of Japan worry outloud about interest rates and their own ability to keep them down. After all, we've seen such idiocy from our own Fed, so don't think it can't happen elsewhere. It can and it will.

President Obama's nomination of Dr. Jim Yong Kim is receiving immediate reaction in the global media as an inspired and surprising choice. It is indeed both

It is inspired not merely because by nominating a Korean-born U.S. national, President Obama virtually assures Asian and some other developing world support for his choice, thereby countering the growing chorus for a non-U.S. national to lead the Bank and virtually assuring his selection, which it does. It is inspired not just because Dr. Kim is the first U.S. nominee to have actual, deep experience as a professional in global development issues (such a novel concept!), which he is. And it is inspired not solely because it reflects the broad and growing ethnic and cultural diversity within the United States itself and thus reflects a multicultural world view that President Obama is uniquely suited to promote, which it does

While I believe all the above to be true, the central reason this appointment is inspired -- and also surprising (leaving aside the astonishing ability of the Obama administration to avoid having the name leaked ahead of time) -- is that it is the most self-conscious recognition to date that the World Bank's role as principal financier to the developing world has shifted to the point that it is more important to have at the helm of the institution someone conversant in cutting-edge development issues than finance and policy formulation. [emphasis added]

by Scott White | Former deputy general counsel, World Bank; Former chief capital markets and pension investments lawyer, World Bank

Looks like it could be a turning point in the global economy and the approach to development. Neoliberals will likely see it as loosing their grip, however, with the appointment of someone that is apparently not one of them.

This is one of the historical issues the European Union and the Eurozone was supposed to prevent from arising again.

It is certainly not the first time in history we see the resurgence of such elements in the midst of severe economic crisis. When a country is pushed to desperation and people lose hope, hate mongers gain ground. However, we need to raise our voices to prevent the Greek Parliament from being infested by extremists. Recent governments have led to the country's economic collapse. Now the people of Greece have to stand up, raise their voices and prevent future governments from destroying the country's moral fiber and tradition of democracy.

Nicholas Sarkozy, losing ground to his left-wing opponent, recently attempted to co-opt the right, also rising in power by offering an anti-immigrant platform for the coming election in which which his poll numbers were dropping.

The danger is not yet that an extremist right-wing party will gain power but rather that the political discourse and subsequent governance will move in that direction.

That's just politics, right? Not so. The agenda of the extreme right is nationalistic, xenophobic, and abjures international coordination in meeting not only political but also economic issues by cooperating with other than extremist governments. The is the scenario that presaged WWII and the arms build up before it.

This trend would be poisonous to the only solution to the problems besetting the EZ by going forward toward greater political and economic integration by adopting a common fiscal authority. Lacking that, the other choices are either continuing to punt, which is unsustainable, or else some countries abandoning the euro.

Will this trend end with Greece as the Eurocrats seem to fantasize? Or will the contagion spread to Portugal, Spain, Italy, and Ireland as austerity continues to bite? Or will austerity see the rise of even more extremism in Europe and further unforeseen complications? The current trend is not encouraging.

The Eurocrats that tried to force greater political union economically seem not to have considered the possibility that the EZ was not an optimal currency zone due to asymmetry, and they don't seem to have a viable Plan B to deal with the issues now that they have arisen. Economics and politics are now joining together to complicate the issues and restrict the possibilities.

This is not a trend that is only affecting the EZ. The US has seen the greatest rise in extremist groups in recent history since the election of President Obama, no doubt due in part to the economic background against which this is taking place.

Paul Krugman reflects on the paranoid style of GOP politics that is now ascendant. Regardless of what one may think of Krugman as a political commentator, his remarks about this attempt to conflate limited with government with privatization being pushed by the Grand Acquisitors raises an important point not only politically but also economically, and its manifestation as political propaganda in the paranoid style have deep significance for macroeconomics and economic policy in the US for anyone understanding sectoral balances.

By fostering the notion that all government intervention in the domestic economy — other than through crony capitalism and political corruption in favor of the elite, of course — is "road to serfdom' and statism, the stage is being set for a greater role of private debt versus government injection of net financial assets other than directly at the top. It is rising private debt that is the road to ruin rather the increase in "public debt," as portrayed.

The result of decreasing the "size" of government is either deflationary with high unemployment if private debt or net exports do not increase, on one hand. But given the current state of the global economy, the US will likely remain a net importer for some time, exacerbating the problem of continually financing consumption with private debt owing to stagnant income other than at the top.

On the other hand, if private debt increases to close the output gap by supplementing income other than at the top, then the danger is another financial crisis on top of the current one, since the growth of private debt is unsustainable, unless gains from investment and productivity increases are distributed as income to service the debt. The experience of recent decades is, however, one of stagnant wages and increasing profit margin, moving productivity gains to owners and top management rather than sharing with workers. Accordingly, workers have accumulated debt in excess of ability to pay, which is still being worked through.

While Professor Krugman doesn't draw this economic conclusion, those who understand MMT will see the handwriting on the wall.

Of course, this should not be considered an endorsement of current Democratic economic policy and thinking, either. The Democrats seems to be under the spell of the illusion that the Clinton surplus created unprecedented prosperity with out consequence, when actually the government "saving" just translated into increased private indebtedness that eventually exploded into financial crisis. Now they yearn for reduction of "public debt," seemingly unaware that that the public debt represents non-government net saving, since the deficit provides the funds that get saved as government securities, given the politically imposed requirement for deficit offset.

But Professor Krugman does put his finger on the psychological dynamic and how it being used to manipulate political discourse in favor of greater privatization in the name of less government intrusion in order to reduce the threat of statism, while the hidden agenda is further redistribution of income and wealth to the top.

What I find most alarming in this push toward privatization is its creeping into the military and security services. This is fatal for liberal democracy and the hallmark of empire.

Saturday, March 24, 2012

This headline from a Bloomberg article that follows up on the situation between MF Global and their banker JP Morgan. The article is mostly out of paradigm in that it reports these matters in a way that misses the basic abstract nature of our banking system.

But the Bloomberg people are not the only ones who can't get a handle on these systems, here from the article is an excerpt from a Congressional inquiry report, trying to explain these events:

“Over the course of that week, MF Global (MFGLQ)’s financial position deteriorated, but the firm represented to its regulators and self-regulatory organizations that its customers’ segregated funds were safe,” said the memo, written by Financial Services Committee staff and sent to lawmakers.

I bring attention to this government report's use of the word "segregated"; like somehow the system consists of a big vault room with different physical deposit boxes that are "segregated". This is absurd.

Hat tip to Naked Capitalism where Yves has covered this Bloomberg story but Yves has in a way been misled by the context here and has written that the customer accounts had been "raided". Nobody is "raiding" anything here. The system is just a big "spreadsheet", as Warren Mosler often describes it, that keeps track of double entry accounting transactions, and depository institutions are entrusted to operate the system conservatively and with integrity.

Our banking system is not best understood by watching a Harry Potter movie and the goblins that run the Gringott's Bank in those fictional stories by J.K. Rowling. Here's a picture of Harry and friends who have just come out of a "segregated" account that looks like it has been "raided" and the "funds" have been "moved":

This is an image from a children's movie and does not in any way represent the real world of modern banking, our system is all on computer based integrated information systems these days; which keep track of double entry, offsetting accounting transactions.

Friday, March 23, 2012

Revealing discussion this AM on CNBC about the Affordable Care Act I guess aka "Obamacare". I don't even know what so-called "Obamacare" is, which is interesting as if you listen to opponents of it, "Obamacare" is supposed to be holding up a lot of business decisions and somehow holding the economy back. I've never understood this opinion as I would bet 99% of real business people don't even know what it is.

Well, anyway, there is some edifying discussion in the hit below. Taking the opposing view is former Presidential advisor Lawrence Lindsey. First, Lindsey complains that the act is "incoherent" (but then he goes on to explain it, which is revealing), then he opines that this act will have the unintended consequence of many businesses deciding to pay a $2,000 "fine" and letting their employees just go join the public system. This he looks at as a problem and a "disaster for the federal budget" . How can the federal budget suffer a "disaster"?).

It's interesting as he does a quick calculation based on 50% (BTW I think it will be MUCH higher) of those currently receiving health benefits via their employer being put into the public plan, and this will result in an additional $140B in federal outlays based on the Federal government paying the additional $4,500 per employee. This is really the only complaint that Lindsey has, ie the additional projected $140B in fiscal outlays. Somehow this is supposed to be a "disaster for the federal budget". Please.

This is "chump change" to the federal budget; and there is no problem with the federal government providing these fiscal outlays via keystrokes. In fact the federal government could provide much, much more.

Mike has already reported today downthread, that the federal outlays have been cut by $397B so far this fiscal year; WHERE IS/WAS THE CONCERN WITH THIS REDUCTION IN OTULAYS; if Lindsey is going to get all worked up about a projected $140B annual increase? What about a $400B decrease morons? Do you think this has no effect?

If this is the only argument that opponents to "Obamacare" can come up with, ie that it stands to be a "disaster" for the federal budget (whatever that means); it is no argument at all.

Since Iran’s cutoff from the global financial payments system (when they were kicked off the SWIFT interbank system), Iran has been having trouble exporting oil. Their exports are now reported to be down 300,000 barrels per day. That is putting upward pressure on crude.

Moreover, all the talk of Saudi “additional production” is meaningless unless the Saudis officially cut their price. Rising Saudi output is nothing more than them selling into new demand for their crude; it’s not going to lead to a lower price unless the Saudis ACTUALLY CUT THE PRICE, which they’re not doing.

It’s a very sly move by the Saudis. They can allow prices to rise and blame speculators, while pointing to their increased output (making them look like the good guys), and no one will know that it is them who is setting prices higher. Until the Saudis officially cut price, expect crude to go higher.

New home sales disappoint today, continuing a string of disappointing data this month that included personal income and spending, ISM manufacturing, mortgage applications, unit labor costs, inventories, current account, industrial production, confidence and housing starts.

The economy is softening due to fiscal drag coming in the form of government spending cuts. So far this year, according to the Treasury's operating statement, total outlays are down $397 bln compared to last year. This equates to a subtraction of 2.5% from GDP, all else being equal. Basically it leaves GDP flat to slightly positive.

You'd think by now Robers would have learned something. Either that, or he'd be broke so we'd never have to hear from him again.

But, NO!, there he was just a few minutes ago on CNBC, live from Singapore (he moved to his beloved China several years ago, remember, but then he found out it was too polluted, so he high tailed it to Singapore) talking about how he just went short Treasuries. Again!!!

This time, however, he admitted that he had "bad timing" and Treasuries would probably go up! Really, Jim?

This guy has sold Treasuries more times than you can count. (Him and Peter Schiff, both!) He sold them here, here, here, here, here and on many more occassions that I didn't bother to record.

This guy is the most clueless guy on the planet and it's nothing short of bizarre how the media idolizes him.

Think of all the brilliance we have here: Mosler, Wray, Fullwiler, Kelton, etc and they keep wheeling out clowns like Rogers and Schiff.

In early February, Alabama Republican Spencer Bachus called for a meeting between two of the most quietly influential interest groups in the nation's capital: credit unions and community banks.

Bachus, chairman of the powerful House Financial Services Committee, was looking to ensure the passage of a slew of federal favors benefiting both sides. All the lobbyists had to do was show up at a meeting and figure out how to work together.

It was too much to ask.

The Credit Union National Association and the Independent Community Bankers Association immediately agreed to the sit-down, but as the meeting approached the community bankers abruptly cancelled the event, according to lobbyists and congressional staffers familiar with the plans.

There’s been a lot of chatter about the recent enormous “spike” in interest rates. I want to make some comments and observations.

First, this spike, while large in percentage terms over such a short period is really tiny in nominal terms. Take a look:

Once you have a little perspective the “enormous spike” becomes a joke.

Second point:

Rates are anchored by Fed policy and that doesn’t just mean short term rates, it means rates all along the curve. Whatever the Fed funds rate is will be reflected further out. A 10-year yield is nothing more than a reflection of Fed policy over that term. And since the Fed has been very clear about its intention to keep rates low and maintain a “highly accommodative” policy stance out until 2014, there is not going to be some big move up in rates. We’ve probably already hit the upside ceiling for rates.

Third point:

The rise in rates over the past several weeks has been due to a number of things, one of them being an improving forecast for the U.S. economy AND a dissipation of fears of a European meltdown. (In my opinion, the jury is still out on both of these views.)

In addition there has also been a largely unnoticed, but fairly sharp decline, in reserve balances over the past few weeks. (See chart below.) This has been due to the Fed allowing existing positions on its balance sheet to “roll off” (i.e. proceeds from maturing securities are not reinvested) AND a large amount of bond issuance by the Federal Government this month to cover expenditures, which has not been offset yet by Fed monetary operations.

On that last point, notice the recent upturn in reserve balances on the chart below. The Fed is once again stepping in to add reserves. Bottom line, the bond selloff is probably over.

Wednesday, March 21, 2012

The late Philip Grierson (1910–2006), historian and professor of numismatics at Cambridge University (from 1971), wrote a short essay called The Origins of Money (London, 1977). The monograph is very short (only 33 pages of main text), but it has become something of a classic. Grierson, of course, to some extent relied on the findings of earlier literature, especially anthropologists like A. H. Quiggin (1949) and Dalton (1965), and economists with a knowledge of the anthropological literature like Einzig (1948 and 1949).

In 1976, the journalist Jude Wanniski wrote an essay, “Taxes and a Two-Santa Theory,” little noticed at the time and virtually unknown today, that put forward a theory that has had extraordinary influence on the Republican Party. Indeed, virtually everything Republicans say about taxes and spending today echoes that theory.

I get a lot of queries about the difference between fixed and flexible exchange rates in terms of the options that each present a sovereign, currency-issuing government. I considered this question several times in the past. Many of those questions are pitched in terms of the basic macroeconomic framework for an open economy that appears in most mainstream macroeconomics textbooks, particularly those written in the 1970s, 1980s and 1990s. I am referring here to the Mundell-Fleming model which has been the mainstream staple for many years. The modern textbooks still teach these models but the exposition has evolved although remains deeply flawed. It seems that this conceptual framework is still used to make public comments along the lines that the US government is facing insolvency and that the euro remains the best monetary organisation for Europe. Those conclusions are as flawed as the model that spawns them. Flawed macroeconomic models lead to erroneous conclusions.

Tuesday, March 20, 2012

My paper “Instability in Financial Markets: Sources and Remedies” for the INET conference “Paradigm Lost: Rethinking Economics and Politics“, to be held in Berlin on April 12-14, is now available via the INET website.

If you’d like to download it, you can get it either from my INET page, or from a link on the conference program. For copyright reasons I can’t reproduce it here, but I can provide a quick synopsis and some excerpts, so here goes....

Rogue gives an example to show that "just because you put a floor on a price for something does not tell you anything about how high its price will go. Not when you only have a finite supply of that thing."

JKH has magisterial post up on the recent dust-up over Saving as perceived in various sectoral models — one-sector (global, for instance, or government- and trade-balanced domestic private sector); two-sector (government and private including international); the most common MMT construct, the three-sector model (government, domestic private, and international); the rather uncommon four-sector model (government, international, domestic household, and domestic business); or even a seven-billion-plus-sector model, in which each individual (and business, and government) is represented as a sector.

His key point, I think — one I agree with profoundly — is that people need to be very clear on which model they’re assuming when they use the word Saving, or the construct “S.” (People sometimes use those two differently, with different implied sectoral models, sometimes within a single discussion or even a single sentence.) In most cases the different constructs of saving and S that people throw around are absolutely valid within their (implicit) sectoral models. The problem arises when people are talking about different sectoral consolidations within the same discussion, without themselves and/or their interlocutors being (fully) aware of it.

I’ve left a few glancing comments over there, but it’s prompted me to write up some thinking here that’s conceptually related.

Steve reflects cursorily about the nature of the Fed and its relation ship to the federal government, the Treasury specifically, and the private banking system, proposing four different ways of thinking about this, and invites others to specify this more rigorously in terms of current institutional arrangements and operations.

I my view this kind of articulation is needed, since all these views, and probably some more are currently being either advanced or presumed. This is an area of significant contention, and it comes up as soon as I start discussing MMT with many people who are a particular conception of this, usually different from the way MMT frames it. As usual, the framing of the matter is crucial to discussion of related issues.